Category Archives: economic growth

What Should A Fiscal Conservative Do?

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From a reader of my blog:

“I personally believe Mr. Trump is grossly unfit to serve as President and if elected, it would be more than a huge problem. Since he lies or changes his mind on most everything, I worry when you say anything such as your comment that he won the debate. He is for the second amendment, he favors tax cuts, etc and there is nothing that sheds light on whether he even understands the complexity of these issues, let alone has any notion of how to create and implement a policy to accomplish these things. I believe many people are making comments that have the effect of normalizing his behavior and candidacy.”

I began writing this blog, It Does Not Add Up, almost four years ago, right after the presidential election of 2012.  By now I have written over 500 posts, mostly on fiscal and economic issues but occasionally branching out into important social issues as well.
As I see it, I have four choices when I vote for president this year.  I can:

  • Vote for Hillary Clinton. She is safe and predictable but the policies she promotes will do very little, if anything, for the faster economic growth which we so badly need. She wants to raise taxes on the wealthy. Fine, but this is only in order to increase spending for new programs, which is likely to lead to even bigger annual deficits and more accumulated debt.
  • Vote for Donald Trump. Like so many others, I assumed initially that his candidacy was a joke and that he would quickly fade away. But now he is a major party nominee and has some good policy ideas as well as some very bad ones! As president he would be constrained by Congress. In particular the Republican House has many excellent ideas on how to get our economy back on track.

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  • Vote for Gary Johnson. The Libertarian candidate also has good ideas on how to solve our fiscal and economic problems but has essentially no chance of being elected.
  • Refrain from voting for president.  But voting is a citizen’s first duty. 

    Conclusion. I fully agree that Donald Trump is a very risky bet for president. But the alternative is to elect Hillary Clinton and hope for a better choice in four years. What should I do? 

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Why Slow Economic Growth Is So Dangerous

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In my last post I said that Donald Trump won the first presidential debate, in spite of his uneven temperament, because he was more correct on the issues.
One of the biggest problems our country faces is slow economic growth, averaging only 2% per year since the end of the Great Recession in June 2009.  This compares with an average rate of growth of 3.5% from 1950 – 2000.
In fact, even the recent job growth we have seen is now leveling off.
capture65Such slow growth is very dangerous long term for many reasons:

  • Massive Debt. Our public debt, on which we pay interest, is now 75% of GDP, the highest it has been since right after WWII. CBO predicts that this percentage will keep getting steadily worse without major policy changes. Faster growth means more tax revenue and therefore smaller annual deficits. It is imperative to put our accumulating debt on a downward path.
  • The Need for More Jobs and Better Paying Jobs. The best way to achieve broad based prosperity, and minimize populist disruption, is to create a tight job market where employers have to compete for employees. This is accomplished by making the economy grow faster.
  • Keeping Ahead of China. In 2009 China’s economy was 1/3 the size of ours; now it is 60% as big. In other words, China will soon surpass us economically if we are unable to grow faster. This would risk losing our worldwide lead in such crucial areas as new technology and financial depth, as well as our superpower status.
  • Reducing Student Loan Debt. The best way we can help former students pay off their college debt is to have good jobs waiting for them when they leave school. The faster our economic growth, the better we can do this.

Conclusion. Both our own individual success in life as well as the overall status of our nation depends upon the availability of opportunity. This is why economic growth is so important and why it is dangerous to let it lag.

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The Economy Is Improving But Not Fast Enough II. What to Do?

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Our economy is doing a little better recently but not nearly as good as it could be.  In my last post, “Men without Work,” I present Nicholas Eberstadt’s data that a significant part of the problem is the very large number (9.5 million) of prime working age (25 – 54) men who are unemployed and not looking for work.
Statistically, such men are likely to be un-workers if 1) they have no more than a high school diploma, 2) are unmarried and without dependent children, 3) are not immigrants and 4) are African American.
Two other relevant factors are 1) the huge increase in employment for prime working age women, from 34% in 1948 to 70% in 2015 and 2) the very high male arrest and incarceration rates for blacks and those without a high school diploma.
Obviously, it is highly detrimental to society to have such a large number of men who are idle during their prime working years.
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Here are several ways to address this problem:

  • Revitalize America’s job-generating capacities. More businesses have closed than opened in each year since the 2008 financial crisis.  Furthermore, the growing regulatory burden is not a recipe for encouraging entrepreneurship.
  • Reverse the perverse disincentives against male work embedded in our social welfare systems. The Earned Income Tax Credits should be extended to single adults without dependents. Eligibility for disability income should be tightened considerably.

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  • Come to terms with the enormous challenge of bringing convicts and felons back into our economy and society. The huge increase in incarceration rates in recent years has coincided with a dramatic drop in rates for both violent crime and property crime.

Conclusion. One good way to speed up economic growth is to put more unemployed prime working age men back to work. There are several very concrete steps which can be taken to do this.

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Men without Work

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As most of my readers know (but I’ll remind you anyway!), I have two major themes on this blog which are:

  • Slow U.S. Economic Growth, averaging just 2% per year since the end of the Great Recession in June 2009.
  • Massive Debt Accumulation, now 75% (for the public debt, on which we pay interest) of GDP, the highest since right after the end of WWII.

My last post, “The Economy Is Improving But Not Enough” points out that even the latest very good news, that median household incomes were up by 5.2% in 2015, doesn’t get us back to where we were before the financial crisis hit.
A new book, “Men without Work,” by Nicholas Eberstadt sheds much light on why our economy is growing so slowly.  Says Mr. Eberstadt:

  • Between 1948 and 2015, the work rate for U.S. men age twenty and older fell from 85.8% to 68.2%. Even for prime working age men, age 25 – age 54, the work rate fell from 94.1% in 1948 to 84.3% in 2015.

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  • This translates into 9.5 million prime working age men who are not in the workforce, even after correcting for the million or so of these men who are in school or training.
  • Statistically, men age 25 – 54 are more likely to be an un-worker in 2015 if 1) they had no more than a high school diploma, 2) were unmarried and without dependent children, 3) were not an immigrant and 4) were African American.
  • Looking for possible explanations for so many unemployed men, it is noteworthy that the work rate for prime working age women has increased from 34% in 1948 to 70% in 2015.

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  • One reason for so many unemployed men is the high arrest rate and incarceration rate for working age men, especially blacks and those without a high school education. In fact, Incarceration rates are way up even though violent crime is declining.

    capture62Conclusion. It seems obvious that having such a large, and growing, number of prime working age men out of the work force is a very serious problem. Besides slowing down economic growth, they are losing their best opportunity for personal fulfillment.  What should be done to turn around this deplorable situation?  Stay tuned!

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The Economy Is Improving But Not Enough

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It has been widely reported that medium household incomes were up 5.2% to $56,500 in 2015.  Furthermore the lower income quintiles have gained the most.  This is very good news.
capture54But this new peak is below the previous peak of $57,400 in 2007, before the Great Recession started, which in turn is below the absolute peak of $57,900 in 1999. Now look at economic growth more broadly.
capture55The second chart shows the annual rate of real (i.e. inflation adjusted) GDP growth, by expansion period, all the way back to 1949.  What is most striking is that growth has been steadily decreasing over this entire time period and is now down to an average rate of just 2% during the current recovery. There is really only one way to reverse this steep decline.  It is to return to proven fundamentals as well explained by the economist, John Cochrane.  In summary:

  • There is only one source of growth. Nothing other than productivity matters in the long run. And, unfortunately, the business investment which leads to gains in productivity is way down.
  • The vast expansion in regulation is the most obvious change in public policy accompanying America’s growth slowdown.
  • The basic structure of growth-oriented tax reform is lower marginal rates paid for by removing exemptions and loopholes. A high corporate tax rate hurts workers more than anyone else.
  • Solving our immigration problem would turn 11 million illegal immigrants into productive citizens. Guest worker and e-Verify enforcement are fixable problems.
  • International trade with strict reciprocity between trading partners will benefit almost everyone. Manufacturing workers who lose their jobs to foreign competition need robust retraining programs for the many manufacturing jobs which still exist.

Conclusion. Faster economic growth is imminently doable. Just follow tried and true economic fundamentals!

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The Remarkable Human Progress of the Last 200 Years II. What Has Caused It?

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In my last post, “The Remarkable Human Progress of the Last 200 Years,” I presented the findings of a new book by Johan Norberg, “Progress: ten reasons to look forward to the future.”  Mr. Norberg details how much human welfare has progressed in such fundamental ways as food availability, improvements in sanitation, increased life expectancy, poverty reduction, gains in literacy, decline of slavery, and equal rights for all.
This raises the obvious question: What is responsible for all of this enormous progress?

capture52An answer to this question is provided by Matt Ridley in his book, “The Rational Optimist: how prosperity evolves.”  First of all, Mr. Ridley points out that since the year 1800, income per capita has increased nine times (in constant dollars) and even though the rich have gotten richer, the poor have done even better.
But in addition it is the “invention of invention” attributed to the evolution of human nature which has led to the explosion of innovation in the past two centuries.  So what propels this explosion of invention?  According to Mr. Ridley:

  • It is not Driven by Science. In fact science is more like the daughter than the mother of technology.
  • Money is important to innovation but not paramount. For example, the pharmaceutical industry often simply buys small firms which have developed big ideas, rather than large companies developing their own products,
  • There is little evidence that Intellectual Property, i.e. patents, is what drives inventors to invent.
  • Government is bad at innovation. In fact it is more likely to crowd out resources which could be put to better use by the private sector.
  • In fact it is the ever-increasing Exchange of ideas which causes the ever-increasing rate of innovation in the modern world.

Conclusion. “The more you prosper, the more you can prosper. The more you invent, the more inventions become possible. … There is an inexhaustible river of invention and discovery irrigating the fragile crop of human welfare.”

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Donald Trump Needs a More Positive Message

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As regular readers of my blog posts know, I am not enthusiastic about either of our two main presidential candidates because neither of them has a good grasp of our two biggest economic problems which are:

  • Slow economic growth, averaging just 2% per year since the end of the Great Recession in June 2009. Faster growth would solve or alleviate many other problems, especially by creating more new jobs as well as delivering faster wage growth for all middle- and lower-income workers.
  • Massive debt now at 75% of GDP, the highest it has been since right after WWII, and projected by the Congressional Budget Office to get steadily worse unless big changes are made in spending and tax policies. Such major changes are difficult to make without presidential leadership.

Hillary Clinton promises “equitable” growth but her policy proposals will lead to a big increase in spending (bad idea) on projects of dubious value in speeding up economic growth. Donald Trump would hurt the economy with immigration controls and trade restrictions.  His proposal for lower tax rates (good idea) needs much improvement to avoid increasing annual deficits.
capture40Mr. Trump’s biggest problem, however, is his negative message about life in America today. Yes, we need stronger border security but we don’t need a Fortress America.  As the American Enterprise Institute has just reported, worker satisfaction is greatly improved since 2009 and workers are now much less anxious about job security than just a few years ago.
There is a really good way for Mr. Trump to sound a more positive note.  He could very easily take up the major themes of the Republican House Plan, “A Better Way” for solving America’s major economic problems.
Conclusion. There is an overwhelming desire for change in America, for new leadership which breaks out of the corruption, cronyism and elitism so rampant in Washington DC today.  But Americans are natural optimists and want a leader who can look forward to a bright future for our country.

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Can U.S. Economic Growth Be Speeded Up? II. A Major Roadblock

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In my last post, “Can U.S. Economic Growth Be Speeded Up?”  I pointed out that:

  • GDP growth has averaged just 2% since the end of the Great Recession in May 2009.
  • The Federal Reserve has taken unprecedented steps to keep interest rates low in the meantime but these efforts aren’t boosting GDP and, in addition, have quite harmful side effects.
  • Wages are growing and consumers are spending money but business investment is shrinking and productivity growth is slowing.
  • This means that the problem is supply side rather than demand side, contrary to what many economists are saying.

At least part of the problem is a lack of skilled workers. Two articles in today’s Wall Street Journal, here and here point out that:

  • America is now home to a vast army of jobless men, seven million of them age 25 to 54, who are no longer even looking for work. This is 15.6% of the traditional prime of working life.
  • Openings for manufacturing jobs this year have averaged 353,000 per month up from 311,000 per month in 2015 and 121,000 per month in 2009.
  • According to the Manufacturing Institute, 8 in 10 manufacturing executives say that the growing skills gap will affect their ability to keep up with customer demand.Capture39
  • As shown in the above chart, at the present time there are only an average of two unemployed manufacturing workers for each job opening, way down from the level in 2010.

Conclusion. Speeding up economic growth requires new business investment in order to increase worker productivity. But a lack of skilled and trained workers will greatly hamper this effort.  The solution here is better vocational and career training in high schools and at community colleges.

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Can U.S. Economic Growth Be Speeded Up?

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It is widely recognized and deplored, see here and here, that economic growth in the U.S. has been very slow, averaging only 2% per year, since the end of the Great Recession in June 2009.
The Federal Reserve has taken unprecedented steps to limit the severity of the recession by holding down both short term and long term interest rates.  But these efforts are only partially working and are, unfortunately, having a number of negative effects as well.
It also has been made quite clear that the problem is supply side and not demand side.  This is because, on the one hand, wages are beginning to rise more quickly and consumers are spending more money but, on the other hand, business investment is shrinking which is leading to slow productivity growth.
Capture38The American Enterprise Institute’s James Pethoukoukis has just provided new data  on the current weakness of business investment as illustrated in the above chart. Furthermore he quotes the economist, Robert Gordon, who has clearly described the many headwinds holding back the U.S. economy to the effect that:

“The American tax code exerts a downward pressure on capital formation and therefore on economic growth. It is now 30 years since the passage of comprehensive federal tax reform in the U.S.  In the intervening years, nearly every developed country has reformed its tax codes to make them more competitive than that of America.  Meanwhile the U.S. has allowed its tax code to atrophy.”

Conclusion. Yes, economic growth can be speeded up. But monetary policy won’t do the trick.  Congress must intervene with the right changes to fiscal policy, i.e. lowering tax rates for both individuals and corporations, paid for by closing loopholes and shrinking deductions.

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The Economic Damage Caused by Very Low Interest Rates

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As is well known, the Federal Reserve’s main tool in responding to the Financial Crisis in 2007 – 2009 has been quantitative easing (to lower long term interest rates) and direct reduction of the Federal Funds Rate (to lower short term interest rates). These measures definitely limited the severity of the Great Recession resulting from the Financial Crisis.  But the recession ended in June 2009, more than seven years ago.
Capture37In the meantime the continuation of such low interest rates is having many detrimental effects such as:

  • Pension funds, both public and private, have become greatly underfunded,  creating crises especially for state and local governments with defined contribution plans.
  • Retirement plans for millions of seniors have been upset by erosion of savings.
  • Inequality has increased as affluent stock owners benefit from the rapid increase of asset prices as investors reach for yield.
  • An immense misallocation of capital towards bond issuers at the expense of small business is taking place.
  • Federal debt is soaring as low interest rates make it much easier for Congress to ignore large budget deficits.
  • The next recession, when it inevitably arrives, will leave the Fed in a bind. The only tools remaining are a new round of quantitative easing (additional bond purchases) and even lower (i.e. negative) interest rates.
  • The Fed’s dual mandate of low unemployment (currently 4.9%) and price stability (low inflation) is being met but is accompanied by anemic GDP growth averaging only 2% since the end of the Great Recession. Such slow economic growth is largely responsible for the populist revolt in the 2016 presidential race.

Conclusion. Monetary policy can only accomplish so much. It is critical for the Fed to wind down its $4.5 trillion balance sheet as its bond holdings mature and to keep raising short term interest rates.  This will force Congress to step up to the plate with the changes in fiscal policy which are needed to stimulate economic growth.

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